VAT on self builds
At a glance:
- Labour: zero rated for VAT;
- Materials used in the build: VAT can be reclaimed on a new build property;
- Services, such as architectural fees, scaffolding and plant hire: VAT must be paid and cannot be reclaimed;
- Garages for use with the new dwelling AND on the planning permission can be claimed for;
- Landscaping costs can be reclaimed, but only if they have been specifically approved by your local planning authority as part of a formal landscaping plan;
- Gas and electrical appliances, when wired in and designed for heating/cooling/purification of air, space or water, such as air-conditioning units (check the form)
- Only one VAT claim is allowable and it must be submitted within three months of completion; and,
- HMRC will want to see a valid planning permission and a completion certificate, or similar.
The sale of new dwellings is zero rated for VAT in the UK. It therefore follows that the sale of eligible labour and materials used in the course of the construction of a new dwelling is also zero rated for VAT. Self Build projects are eligible for VAT exemption, but they must create a new dwelling, that is for you to use as your own home. They must also be lawful and evidence of completion must be provided.
There are other conditions for different types of projects (such as renovations that bring a building back into use after 10 years), and if you are eligible you need to follow the process for claiming the VAT back AFTER you’ve paid it. Consequently, you need to obtain VAT invoices and keep precise records to ensure your claim is accurate. You can only submit one claim.
Those commissioning or building their own home using VAT registered builders will receive invoices at the zero rate of VAT (on eligible goods and services).
A custom or self builder buying building materials for use in the course of the construction of a new dwelling can recover input VAT so they benefit from the zero rate. Those who already have a VAT registration are able to reclaim VAT paid under the rules for Self Supply of Goods and Services through their regular return. Find out more about Government rules here and here.
Those who do not have a VAT registration can still recover VAT using the scheme for DIY Homebuilders and Converters called VAT Notice 431 NB (New Build) and VAT Notice 431 C (Conversion). The forms have extensive and very helpful notes on them.
You should not pay any VAT on labour regardless of whether your trades or builder are VAT registered or not. You don’t need to provide any evidence that you are a self builder to your contractor for them to zero rate the labour element, but you do need to keep an eye on any invoices to make sure you have not inadvertently been charged VAT on labour.
If you have, then you will need to challenge the builder and reclaim it from them not the taxman as HMRC will not refund VAT that has been incorrectly charged. Or, if a contractor uses their trade account to source your materials, which is in their name, ensure that you pay the supplier direct and keep the evidence, as it will be required.
Only a single claim to recover VAT can be made and it must be submitted within three months of completion.
Get this wrong and you will miss out!
VAT on conversions
There is a slight difference when it comes to conversions where there will be a 5% VAT rate applied to labour when you use a VAT registered builder and reclaim under VAT notice 431(C), as mentioned above.
Good housekeeping for your VAT process
- Keep the ORIGINALS of all of your VAT invoices and receipts as you will need these when you make your VAT reclaim; copies are not allowed.
- Choose and rigorously maintain a system for your receipts. This should include a spread sheet and a hard copy storage system, such as a concertina file, that mirrors your ordering – ideally that reflects the form you will be using. Do not leave this to the end of your build and stay on top of it daily/weekly!
- Invoices should include the supplier name, their VAT number, invoice date, value, a description of goods supplied.
- Online purchases also need a VAT invoice – a confirmation email is not sufficient.
- Any receipts for individual items over £100 need to include your address, or the site address so a till receipt will not suffice for these items. The HMRC website has more information on what can and can’t be reclaimed or check with the VAT helpline.
What you can’t claim VAT for:
- Professional services (on a self build or conversion).
- Equipment hire, such as plant or scaffolding,
- Consumables, such as sandpaper or hand tools,
- Kitchen appliances, including those integrated, for example hob, oven, dishwasher
- Bedroom furniture, bathroom furniture, such as vanity units and free-standing units
- Carpets, curtains and blinds (unless they are integral, eg sealed in the unit)
- Delivery costs, when separately invoiced by a courier
- Separate buildings that are part of your planning permission, apart from a garage, such as a store or a detached swimming pool building
- Extending or renovating an existing house.
- Creating a separate building or annexe.
- Building holiday lets or a building to rent (this is business use).
- There is an intermediate rate of VAT (5%) which applies to some works, for instance turning a house into flats, or flats into a house, or for work on a house unoccupied for more than two years. But the work cannot be done on a self-build basis — you have to employ a VAT registered contractor.
- Listed buildings have some very complex VAT rules — refer to HMRC.
Consider recruiting a professional to ensure the VAT recoverable is the maximum recoverable. Try Rubie who specialises in Self Build.
VAT On Infrastructure for Serviced Plots
Custom build and some self build properties involve serviced plots, where the infrastructure, such as roads, and services are in place, and some form of planning consent has been established.
The cost of connecting utilities and other civil engineering works made in the course of the construction of a ‘building designed as a dwelling’ is zero-rated for VAT.
The point at which the zero rate is applied is when construction work has progressed above foundation level. This is usually when the first brick or block (the golden brick) is laid upon the foundations (the walls need not be above ground level). Graven Hill’s approach is Golden Brick – find out more.
VAT paid on civil engineering works paid by a developer in the creation of serviced plots is standard rated until ‘golden brick’ stage and so the VAT paid on civil engineering works is passed on to the custom or self builder, unless the sale includes commencement of construction.
Serviced plot developers can alternatively recover the input tax paid on civil engineering works made in the course of creating serviced plots by opting to tax the sale of land (sale of land and buildings is normally exempt from VAT) but this route is not appropriate for individuals buying a serviced plot, as they cannot recover VAT paid on land under Notice 431NB or 431C.
Stamp Duty Land Tax SDLT
Building plots (or buildings for conversion) where construction has not yet commenced are classed as non-residential property and accordingly the SDLT rate applied is that for non-residential property, unless the land is already in residential use because it forms a dwelling that is to be demolished and replaced in which case the residential property rate of SDLT (LBTT in Scotland and LTT in Wales) will be applied.
Rates for non residential property are frequently lower than for residential property so there is less tax to pay, especially on higher value transactions. An additional benefit for those who already own a residential property, i.e. their main home, a buy to let or second home, is that the 3% surcharge for additional residential property levied across the UK is not triggered.
Building plots where construction of a new dwelling has already commenced or a contract entered into for the commencement of construction of a new dwelling, are classed as residential property and therefore SDLT is applied at the rate for residential property (LBTT in Scotland and LTT in Wales). Where the custom or self builder already owns a residential property, the transaction to purchase a plot classed as residential property will trigger the 3% surcharge for additional residential property.
For those replacing their main dwelling, there is a way to recover the additional 3% surcharge providing they sell their current main residence within 36 months of the additional purchase transaction.
It is not yet clear whether a plot that has been taken to Golden Brick stage to allow a developer to recover input VAT is classed as residential property for SDLT (LBTT in Scotland and LTT in Wales).
A building plot that forms part of a garden of a building capable of use as a dwelling at the time of completion is generally treated as residential property.
Capital Gains Tax
Capital Gains Tax could be levied on your self build, so seek professional advice early on.
Your primary home is exempt from Capital Gains Tax under the Private Residence Relief (PRR), broadly speaking in proportion for the length of time it was your only or main residence. If you have two homes, the sale of the second home will typically attract CGT, which is levied at a higher rate as it will qualify as a second home. See Which for a good guide to CGT and second homes.
For Self Builders, under ESC D49* you can also count the first 24 months (anticipated from April 2020) as a period of ownership if you are unable to occupy the property because it is being built, or because you had not sold your previous home. Plus, there is also an additional 9 months you can offset against CGT if you’ve ever lived in the second home for a proportion of time (currently 18 months, but the reduction is anticipated in April 2020).
With regards to self building and PRR you can nominate your existing home or the self build as your main residence, but you may end up with a portion of your older home (if you nominate your new one as your main residence) attracting CGT.
It is important to get professional advice early on so you can avoid any surprises along the line. What Investment has a good article about the implications, including a reference to a recent case around this, which could further change the situation.
*NOTE: The spring 2020 Budget is anticipated to bring some of these measure into law.
Find out more at on our CIL/S106 EXEMPTIONS page.